Agricultural Policies in OECD Countries: a Positive Reform Agenda

Press Notice

OECD analysis has provided ample evidence of the shortcomings that plague many current farm policies. This report takes the next step and suggests where to go from here. It shows that countries can reap the gains of market-orientation and open trade, while simultaneously addressing legitimate domestic objectives.

Agricultural policies in OECD countries cost consumers and taxpayers over $300 billion a year. On average, more than one-third of farm receipts come from government programmes, although this share varies widely among OECD Members, from almost zero to nearly three-quarters. Total support is equivalent to 1.3% of GDP across the OECD area, yet agriculture accounts for less than 5% of national income in most Member countries. The value of OECD farm support is twice the value of agricultural exports from all developing countries.

It is important to ask whether all this money is well spent. In general, the answer is no. Most current policies do a poor job of raising farm incomes. OECD analysis shows that for every dollar spent on support often no more than 25 cents reaches farm household incomes. Even the most successful forms of policies linked to agricultural activity deliver no more than half of the money spent on support as additional income to farm households. At the same time, there is no evidence that the majority of current programmes are efficient in providing other services that society values, such as protecting the environment, maintaining the countryside, strengthening the viability of rural areas or contributing to food security.

The positive reform agenda suggests that, first, policy objectives should be defined clearly and, second, that problems should be tackled at source. Rather than supporting agricultural production, in most cases it is more efficient to pay directly for a service provided (such as a pleasing countryside) or to collect charges for harm imposed (such as pollution).

Payments for public services provided add to farm income. This will not eliminate all income problems in agriculture. However, deficient incomes are best cured at their root cause, by improving the earning capacity of the farms and individuals concerned, and by creating better paid jobs outside agriculture. Remaining low incomes in agriculture, as in other sectors, can be addressed through general tax and social security programmes. Farm revenues also tend to fluctuate because of the vagaries of markets and nature. Governments can help farmers overcome this problem, without undermining market forces, through futures markets and insurance schemes based on whole farm incomes. Shocks arising from policy reform might warrant transitory decoupled payments.

Reform of domestic agricultural policies along these lines would match spending programmes to explicit objectives. It would also reduce distortions to international trade, because the costs of inefficient domestic policies spill over and are magnified on international markets. Reform of trade policies is further warranted in the context of adjustment pressure at the global level, which results from the propensity for agricultural productivity growth to outpace demand. Trade protection cannot make this global tendency disappear; it can only shift the burden of adjustment onto other countries. Trade reform is thus essential in its own right. Domestic and trade reforms thus go hand in hand: broad based multilateral negotiations have an important role to play in promoting domestic reforms, and vice versa. The post-Doha negotiations in the WTO can build on the start made by the Uruguay Round Agreement on Agriculture.

Yet while agricultural trade reform yields widespread benefits, not everyone will gain in the short run. To facilitate adjustment there may be a need for transitional assistance aimed at those who may be negatively affected. In the case of developing countries, improved access to OECD country markets would be of great benefit, along with assistance in export capacity building and appropriate special and differential treatment.

Fundamental reform continues to be difficult to achieve. For it to proceed, there will be a need for leadership and input from a broader range of stakeholders than has historically been the case, including consumers and taxpayers, industry representatives, farmers and input suppliers, as well as environmental groups. Dialogue among a wider group of interests should enable the policy debate to progress beyond long-held beliefs about the nature of agriculture, some of which are no longer valid. It is time to focus instead on the policy needs of the 21st century.